The Cabinet nod to the gold monetisation and sovereign gold bond schemes has provided an alternative avenue to investors. Under the former, individuals can now deposit minimum 30 gm of gold in either bullion or jewellery with banks for at least a year and earn tax-free interest. Under the latter, gold bonds will be issued in rupees and denominated in 5, 10, 50, and 100 gm of gold.

Gold monetisation scheme

The deposits under the scheme can be made in three buckets: Short term of 1-3 years, with a rollout in multiples of one year; medium term of 5-7 years and long term of 12-15 years. For short-term deposits, the interest will be denominated in volume terms or grams of gold. For the medium- and long-term deposits, the interest will be denominated in rupees, based on the value of the gold deposited. While banks will have the discretion to set the interest rate on short-term deposits, the government will decide the rate for longer-tenor deposits. While interest rates have not been made public, it could range between 2% and 3%.

Banks will melt the gold and get a value from BIS-approved hallmarking centres. Both principal and interest payment to customers will be valued in gold and the interest on the gold deposits will be decided by the bank. The purity of the gold will be tested at the hallmarking centres in the country. An XRF machine-test will be conducted to value the amount of pure gold. If a customer does not agree to the machine test, he can take back the jewellery. After the consent of the customer is taken, the ornament shall be sent for melting and the net weight calculated. If the customer is not satisfied with the value after the fire assay test, he can take back the melted gold in the form of gold bars after paying a nominal fee to the centre. If the customer agrees to deposit the gold, he will be given a certificate by the collection centre certifying the amount and purity of the deposited gold.

For redemption, one will have the option to get cash or gold in the case of short-term deposits and the choice will have to be mentioned at the time of the deposit. The scheme will be exempt from capital gains tax, interest will be tax-free and there will be no wealth tax.

According to the World Gold Council, Indian households and other institutions own around 22,000 MT of gold. Of this, the government expects to garner only 20 MT of gold deposits under the monetisation scheme in the first year, which translates into a savings of $8 billion of gold imports. Higher gold imports — $56.5 and $53.8 billion in FY12 and FY13, respectively — resulted in a record current account deficit of 4.2% and 4.8% of the GDP in these two years. India is one of the largest consumers of gold and imports as much as 800-900 tonne every year.

Sovereign gold bond scheme

The scheme will help reduce demand for physical gold by shifting a part of the estimated 300 tonne of physical bars and coins purchased every year for investment into gold bonds. The minimum investment is capped at 500 gm per person per year. The bonds will be available in both demat and paper forms. The tenor of the bond will be 5 to 7 years, which will protect investors from medium-term volatility in gold prices. The bonds can be used as a collateral for loans and the loan-to-value will be set by RBI. The bonds can be traded on the exchange to allow early exits.

Whether enough trading will happen in the exchange is something that will have to be seen, say analysts.

The redemption will be in cash only and the depositor will have the option to roll over the bond for three or more years if gold prices are lower. The government will be exposed to gold price and exchange-rate risk, for which it will create the Gold Reserve Fund. The deposits under the scheme will not be hedged. The capital gains tax treatment will be the same as for physical gold. The KYC norms will also be the same as that for gold. However, investors can avail of indexation benefit to the long-term capital gains arising on transfer of bonds.

Analysts say the Sovereign Gold Bond Scheme will not affect gold exchange-traded funds (ETFs) as the latter have no limits on investments. Moreover, gold ETFs are highly liquid and investors can redeem their units any time they want. Financial planners suggest that, ideally, a retail investor should not allocate more than 10-15% of one’s investment portfolio in gold in which ever form, as any steep and prolonged downturn in its prices could reduce the returns in the long run. Chirag Mehta, senior fund manager, Alternative Investments at Quantum MF, says investment in gold is a good portfolio diversification tool, which helps the investor reduce the overall portfolio risk.

Is it glittering?
-The deposits under the monetisation scheme can be made in three buckets: Short term of 1-3 years; medium term of 5-7 years and long term of 12-15 years.
-For short-term deposits, the interest will be denominated in volume terms or grams of gold. For the medium- and long-term deposits, the interest will be denominated in rupees
-While banks will have the discretion to set the interest rate on short-term deposits, the govt will decide the rate for longer-tenor deposits
-Banks will melt the gold and get a value from BIS-approved hallmarking centres. Both principal and interest payment to customers will be valued in gold and the interest will be decided by the bank
-The purity of the gold will be tested at the hallmarking centres in the country. An XRF machine-test will be conducted to value the amount of pure gold